Are fruit growers the victims of monopsony?

Michigan peach grower Paul Friday believes there is an imbalance of power ­between ­retailers and growers. Photo by ­Geraldine Warner

Peach growers feel they’re getting the profitability squeezed out of their business, and they think the increasing size and power of U.S. retailers has something to do with it.So it was with interest that Michigan peach grower and breeder Paul Friday read an article entitled “How Driving Prices Lower Can Violate Antitrust Statutes” that appeared in the Wall Street Journal last year.

The article explained that the practice of forcing producers to sell at prices below what they would in a free market or below the cost of production is known as monopsony. It reported on concerns that a few giant agribusinesses might be controlling commodity prices in many markets. This happens when companies gain enough buying power to drive down suppliers’ prices.

In one of several examples, it told how a group of blueberry growers in Maine alleged in 2003 that four large processors conspired to push down the price they would pay for fresh wild berries. A state court awarded them triple damages amounting to about $56 million. The growers, who needed the processors to survive, acknowledged that such a large amount of damages would put everyone out of business, and eventually settled for $5 million.

More powerful

Friday sent the article to Charles ­Wilson, managing director of the National Peach Council, who thought it worth pursuing. “If you take a look at what’s happening to prices to growers, I’m not saying any illegal price pressure has been put on peach shippers or growers by the large retailers, but they have gotten much larger and a lot more powerful,” he noted during the council’s annual meeting in Pennsylvania in February. “We’re just getting killed on prices. Is there anything we can do? We feel that these retailers might be getting too powerful.

For over 20 years, growers have been receiving a shrinking proportion of the price consumers pay for peaches, he said. Friday said when peaches are $1.29 a pound in the grocery store, it equates to about $75 a bushel. The grower might receive $5 of that after packing, shipping and brokerage fees are taken out. He recommended that the Peach Council let other commodity groups know about the issue, since the council doesn’t have the resources to sue anyone.

If there’s really teeth to this thing, we would be foolhardy if we didn’t pursue it and see if there’s anything in it for us,” Friday said. “If this has any teeth it could be the greatest thing I’ve seen in my 45-year ­career in this ­business.”

Walker suggested growers write to their Congressional representatives. “At the same time, you don’t want to do anything that will make the retailer mad, because he’s the one who buys the product,” he added. He thinks that might get representatives talking, which might, in turn, get the attention of some of the powerful ­retailers.” John Lott of Bear Mountain Orchard in Aspers, Pennsylvania, said producers need to be protected from harmful practices at retail, such as slotting fees (which are common for dry groceries) and consignment purchasing.

“I don’t know where it’s going to start or stop. I call it a conspiracy, extortion. We have to have more ammunition. Last year, growers experienced very low pricing. I didn’t see many people willing to pay extra. “Coupled with other industries, we might get some relief,” he added. “I think we can represent ourselves as small businesses that have a disadvantage or are being treated unfairly. I don’t think we have enough ammunition to say it’s illegal.”

Market power

Donald Mullins, attorney with the Badgley-Mullins Law Group in Seattle, Washington, said the term “monopsony” generally applies to situations where market power is exerted on the buying side, whereas monopoly concerns the power of the seller of a product. If there is only one buyer for a certain product, that buyer might have a monopsony.

Mullins, who has worked with the U.S. Department of Justice’s Antitrust Division, said he was aware of a number of lawsuits, many brought by the Department of Justice or state attorneys general on behalf of growers. He has been involved in ­litigation relating to hops.

“I know that the growers, being the first on the vertical chain, often don’t have very much power, and they can be pushed around and manipulated by the packer or distributor and then up the chain,” he said. Ultimately, the impact of retailer power on the marketer is passed to the grower.

Producers would have to prove that monopoly power exists in the buying of a specific product, such as peaches. Then, it would have to be shown that a retailer had a monopoly as a buyer of peaches in a specific geographic area.

For a retailer to be considered a monopolist, it would probably have to control between 65 and 80 percent of the market, Mullins estimated. It would also need to be shown that it is difficult for competitors to enter the market because of the retailer’s dominance.

“These are very, very hard and tough cases to challenge, although the government often does go forward and brings this kind of a claim,” Mullins said. The first step, he suggests, would be for the affected industry to hire an economist to look at the economic situation and the market.

The industry would need to be able to describe the power and the size of the players at the top of the vertical chain and the pattern of buying practices over a period of time. It would not necessarily need to show that major retailers are working together to drive down prices.

Under section 2 of the Sherman Act, if a buyer has enough power and has misused that monopoly power, it doesn’t need to be proven that buyers are working jointly to affect prices. However, if there was communication between them and a joint endeavor to lower prices, it might be a violation of section 1 of the act, which deals with conspiracy to restrain trade. The industry would also need to show that it is being hurt financially as a whole, as well as individual growers.

Armed with information about the market, how the trade restraint works, and the conclusions of the economist, the next step would be to contact the Department of Justice’s Antitrust Division, or the Federal Trade Commission.

These are difficult cases, Mullins said, but he thought it worth pursuing. “I think it’s definitely worth looking into and getting the advice and opinion of a good antitrust economist.” The full Wall Street Journal article, “How Driving Prices Lower Can Violate Antitrust Statutes,” by John Wilke, can be found on the Internet at www.dominalaw.com/cm/dairy_news/dairy_news258.asp.